The Markets & Politicians Got It Right: The Fiscal "Cliff" Is/Was Nothing to Panic About

Why are Congress and the White House not panicked about the looming fiscal “cliff”? Why has the Dow pulled back only 2% rather than plunging 2,000 points as time to forge an agreement by year-end has foolishly dwindled down to just a couple of days, and odds of it happening have become remote? Probably because the markets and politicians are aware that the economy is not going to suddenly plunge over a cliff into an abyss on January 2 if an agreement has not been reached by then. [Let me explain just what it does mean, though.] Words: 785

So writes Sy Harding (www.streetsmartpost.com/) in edited excerpts from his article* as originally posted on Seeking Alpha under the title It’s Only A Fiscal Slope, Not A Cliff!.

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Harding goes on to say, in part:

Fed Chairman Bernanke did the country a disservice in February when he used the term “fiscal cliff” to describe the problems the economy would begin to face at year-end. The media was even more irresponsible by jumping on the phrase with such fear-inducing drama as year-end approached.

It’s true that if an agreement isn’t reached by year-end, tax increases and spending cuts will begin to kick in which, if not amended fairly quickly, would begin to remove roughly $600 billion from the economy next year, enough to take an estimated 2% to 3% out of GDP growth and potentially put the economy into a recession. However, it isn’t that the $600 billion will abruptly disappear from the economy on January 2 in a cliff-drop plunge.

Some effects would take place quite quickly, such as the loss of unemployment benefits for the long-unemployed if the extended benefit period is allowed to expire but most of the effects would come out of economic activity over the course of the year, at approximately $50 billion a month, as:

employees find less in their paychecks due to income-tax increases,

investors pay higher taxes on their dividends as they are received through the year,

investors pay higher capital gains taxes if, and as, they sell holdings through the year and, of course,

businesses would receive fewer orders through the year as federal spending cuts increasingly take effect, resulting in lay-offs.

[While]…it’s been pointed out that tax-payers would face an increase in combined taxes of approximately $500 billion in 2013, that does not mean taxpayers would send a check to the IRS for their share on January 2. It means that if an agreement is not reached fairly soon into the new year, the average taxpayer would see their taxes increase by about $3,440 for the year – and keep in mind that is an average.

Those who can most easily afford it would pay the most in increased taxes [unlike]…when the Bush era tax cuts became law and the richest were getting by far the biggest benefits. Having those cuts expire would bring those chickens home to roost, as the biggest tax increases would fall back on those richest tax-payers. It’s estimated that:

those with taxable income (after all deductions) of $10,000 would see an annual tax increase of $217 ($18 a month),

those between $50,000 and $75,000 an average annual increase of $2,399,

those earning $500,000 to $1 million an average increase of $38,969, and

those earning over $1 million an average increase of $254,637.

Not only would those increases not be an over-a-cliff event, but spread over the year, they would probably not kick in right away in January for most working people. Most employers would wait until the IRS gets around to calculating new withholding rates and sends out notices.

I’m not saying that politicians are not self-serving idiots in the way they have once again inflicted needless stress on the country. Nor am I saying that some damage has not already been done to the economy as a result of the uncertainties the delay has created but the stress that has been put in the minds of many on Main Street (and some investors), that if an agreement is not reached by year-end they will wake up Tuesday morning to an economy that is a heap of rubble at the bottom of a cliff, is a huge exaggeration.

I even like the thought that allowing the economy to go over the supposed cliff for a few days will make it easier for a better agreement to be reached.

Right now to reach agreement, politicians have to debate how much to allow taxes to rise and for whom, apparently difficult for many, but once large tax increases kick in at year-end for everyone when the Bush-era tax cuts expire automatically, they will be debating how much to cut taxes to correct the situation, more appealing to their politicking nature of trying to look like they’re working to help their constituents. [As such,]…the markets (and yes, even the politicians) just might have it right by not panicking at this point.

‘Tis the annual forecasting season. Every economist with a model is publishing detailed forecasts for the U.S. and world economies for 2013. I have no model, and my degrees are in history and law but the signs now are clearer than they have been in some time: 2013-2015 should see beneficial growth of the American economy and that will translate into good results for some companies and good returns for some stocks. [Let me explain my conclusions.] Words: 902 ; Charts: 1

<img width=”90″ height=”65″ src=”http://www.munknee.com/wp-content/uploads/2012/11/cliff-90×65.jpg” alt=”cliff” title=”cliff” />Why make it difficult if it can be that simple…Andy Richter offers the perfect explanation of the Fiscal Cliff in this 1:37 minute video.

The warnings that the fiscal cliff will cause a recession are delivered as if the government can decide whether or not we have a recession. In fact, the government does not have that power, or we would never have recessions. At the most, the government can influence when, not if, we have a recession. We will most likely undergo a recession when we wean ourselves off the unsustainable deficit spending of the last four years. The choice is not recession or no recession. The choice is recession now or recession later. [Let me explain.] Words: 542

<img title=”Recovery-Recession” src=”http://www.munknee.com/wp-content/uploads/2009/09/recovery-recession.jpg” alt=”Recovery-Recession” width=”48″ height=”65″ data-lazy-src=”http://www.munknee.com/wp-content/uploads/2009/09/recovery-recession.jpg” data-lazy-type=”image” /><img title=”Recovery-Recession” src=”http://www.munknee.com/wp-content/uploads/2009/09/recovery-recession.jpg” alt=”Recovery-Recession” width=”48″ height=”65″ data-lazy-src=”http://www.munknee.com/wp-content/uploads/2009/09/recovery-recession.jpg” data-lazy-type=”image” /><img width=”48″ height=”65″ src=”http://www.munknee.com/wp-content/uploads/2009/09/recovery-recession.jpg” alt=”Recovery-Recession” title=”Recovery-Recession” />…Fiscal policy, both in the U.S. and in Europe, has already been a drag on economic growth, and it’s extremely likely to continue to be one as politicians begin addressing concerns about long-term debt burdens. The debate about the fiscal cliff deal might revolve around the preferred paths to reducing the nation’s long-term debt, but it also will determine just how much fiscal policy will limit growth over the coming months and years. What’s really at stake, in the near term at least, is the answer to two important and interrelated questions: How dysfunctional is our political leadership and how bad is our economy going to be next year? Words: 610

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